Like "System", Setting is a word which is used all over the place when people talk about RPGs, but is very nebulous, and means different things to different people. How designers approach settings varies widely, but tends to fall in the following categories, or to combine points from a couple of these categories.
The Implied Setting
This setting is never discussed in the game book, but the way the system is set up, a fairly coherent idea of what the designers were thinking comes through. The most famous example of an Implied Setting, of course, is any form of (A)D&D.
The way an Implied Setting works is by tailoring parts of the system to produce ranges of values which only make sense when you assume a certain type of setting. Details of sych implied settings are sparse to non-existent, and need to be created by the group, either in prep or in play.
The Semi-Implied Setting
With this type of setting, an Implied Setting is given some detail or structure by the use of organizations. These organizations can be anything, but are usually semi- or fully-governmental in structure. An example of this is the original Classic Traveller setting, where the Military, Scout Service, and X-Boat system gave a greater coherence to the general run of group-made Traveller universes than is a more pure Implied Setting.
The Bare Bones Setting
A Bare Bones Setting uses some device such as a combination of maps and/or stats to give a further level of detail and uniformity to group-created settings. Perhaps, though not always, one location is given a higher level of detail as an example for the group to follow in detailing the locations given.
Setting By Fiction
Sometimes a strong sense of particular setting can be created using fiction to illustrate particular concepts and setting details, rather than using expository text. White Wolf games such as Vampire are famous for this.
The Expository Setting
This is a technique whereby the designer uses exposition to detail the setting, laying out whatever level of detail is wanted by writing text to cover that detail. Harn is a particularly detailed setting using exposition to deliver information.
Setting by Assumption
In an Assumptive Setting, the designer makes no effort to give any detail to the setting, because the setting is so well-known. Many modern and historical games such as Wild West or Espionage games assume the Real World is the setting, and anything the group can find out from widely available data and personal knowledge is true.
Setting by Exception
This technique takes the basic form of an Assumptive Setting, with a heavily detailed exception - The Wild West with zombies, or the present world with hidden magic. This is a step towards the Alt Historical Setting, but assumes the exception is singular or hidden, and doesn't actually change history.
The Alt Historical Setting
This is a form of historical or modern game where one well-defined change in the history of the game world renders it very different from our own. What if the X had happened instead of Y? How would the world we know now change? In this type of setting, only the changes in the world are detailed, the rest being Assumptive.
There are more, but these various types show the range of techniques a designer can use to create a setting.